The development of the Norwegian Petroleum Innovation System: A historical overview Ole Andreas H. Engen University of Stavanger Correspondence: [email protected] Abstract This paper addresses the development of the Norwegian Petroleum Innovation System. The characteristics of the Norwegian Petroleum Innovation System were on the one hand the increasing ability to solve bottlenecks connected to production and operation on the Norwegian shelf, and on the other a gradual learning process which enabled a large portion of Norwegian participation in the petroleum business. While the initial phase of the petroleum development of Norway in the sixties was characterised by an absorptive capacity of receiving new technology, the building of Norwegian competence in the seventies and eighties was in certain respects directly shaped by public policy in order to participate. With the Condeep design it became possible to speak of an independent Norwegian petroleum industry. The development of Norwegian producer and supplier companies signified that petroleum activity in Norway was entering a new phase. In the R&D System of Norway petroleum education and research were introduced at several levels. Due to new cost efficient technologies introduced in the nineties, we may say that the adjustment was concluded by the beginning of 21st century. The Norwegian oil and gas actors perceived themselves ready to fully participate in the international system of energy producers. Version of 06.08.2007 TIK Working paper on Innovation Studies No. 20070605 *This paper is part of the project "Innovation, Path-dependency and Policy" (IPP) carried out at the Centre for Technology, Innovation Culture (TIK), University of Oslo with the support of the Norwegian Research Council (Contract no. 154877). However, the Centre, University and Research Council are not responsible for the content of the paper, which is the sole responsibility of the author(s). Introduction This paper addresses the development of the Norwegian Petroleum Innovation System. The foundation of a Norwegian Petroleum Innovation System was laid through the establishment of a particular organisation for offshore oil production that allowed Norwegian participants to convert domestic industrial competence bases into large areas of competencies for offshore oil production. The adaptation of the international oil industry into a Norwegian context was encouraged by a political strategy of integrating domestic firms and enterprises into the large development projects. International oil companies, a wide range of suppliers and local communities accepted this because it facilitated their exploitation of the Norwegian continental shelves, induced job creation, new industrial competence and regional and national development. The petroleum industry, which at the outset was largely foreign- controlled, was thus transformed into a Norwegian Petroleum Innovation System through alliances within the Norwegian industrial environment, Norwegian oil companies, the R&D sector, public administrative institutions and Norwegian politicians (Andersen 1993, Nelson 1993, Engen 2002). Moreover, through different historical phases the petroleum innovation system became more closely integrated into the Norwegian national innovation system and actually became a cornerstone of that system (Gulbrandsen & Nerdrum 2007). In this paper we ask whether Norwegian politicians, the Norwegian administration and Norwegian industrialists contributed to the establishment of this particular industry, and how a domestic knowledge and competence base was created to enable the adaptation and integration of this particular industry. 1 Institutional conditions and absorptive capacity An initial assumption for adapting a new innovation system such as the petroleum industry is that during the course of inward technology transfer, sufficient competence in the application of the technology and organisations is acquired such that new personnel will be able to undertake new innovations and improvements. This is normally referred to as "absorptive capacity" (Cohen & Levinthal 1990). Absorptive capacity refers to the participants' role in initiating a strategy for the selection and utilisation of technology. In the first phase it was the international companies which established the premises for transfer, but both public institutions and private actors in Norway negotiated in a manner that laid the foundations for “national absorptive capacities” upon which it was possible to build at a later stage in the development. The capacities comprised fragments of expertise which functioned in concert, fragments that together helped create national institutional systems for receiving and adapting a petroleum innovation system. Institutional capacity The first official specific Norwegian measures for institutional absorptive capacity comprised the granting of concessions - and taxation laws (Hanisch and Nerheim 1993).1 The concession laws became the primary control instrument for the state in determining which companies should be granted permission to operate in the Norwegian sector and where the operations were to be concentrated, namely which blocks were open for tender. These laws were legally binding for all implicated parties and thereby clarified the relationship between the petroleum sector and the Norwegian State. The laws guaranteed the companies' rights simultaneously with expressing the sovereignty of the state over the Norwegian area of the continental shelf. In fact, judicial sovereignty is the basic requirement for all economic activity. The market must comprise a set of rules defining the negotiating space of the actors including the legal 2 aspects of ownership and contractual specifications (Hodgson 1988, North 1990). The concession laws and the taxation system in the Norwegian sector seen in this perspective comprise a regulation of economic activity, in this case the private exploitation of society's resources. These form parts of an agreement or contract between the state and the private company as to how the resources were to be exploited and the proceeds distributed. In Norway, these types of "contracts" were not unfamiliar. The main principle was largely similar to the concession system formulated some fifty years previously in association with the development of electricity in Norway (Wicken 2007). In the development of both the electricity and petroleum innovation systems, the relationship to foreign capital was central. Foreign capital has always been regarded with scepticism, but has become recognised in varying degrees as necessary to the industrialisation process in Norway. Both at the turn of the century and in the 1960's there was a desire to attract foreign capital to Norway. But this capital was to be controlled, to serve the interests of Norwegian society. In both the regulatory regimes mentioned, state policy created incentive for integrating new innovation systems in Norwegian society. The incentives were derived partly from the concession system itself which required that Norwegian subcontractors were to be employed, but were also associated with the authority granted to Norwegian government agencies to distribute rights among those companies and bodies that they considered would best take into consideration Norwegian interests. Concessions as a form of regulation were the subject of internal Norwegian jurisdiction. Those concluding negotiations for concessions on the continental shelf were lawyers with a thorough knowledge of the legal and administrative process. It is reasonable to assume that previous practice in the electricity concessions influenced the procedures for oil and gas. At the same time the political approach in respect of foreign capital acquired legitimacy. Here the 3 procedures were in the tradition of the Lie Commission.2 An organisational regime was, in other words, both politically and judicially legitimate. Both the aims and the means were available when the foreign companies presented themselves, and traditions existed enabling these means to be utilised (Wicken 2007). In the meantime, it is important to point out that the formation of regulations in Norway was not a process where representatives of the Norwegian administration independently determined the outcome of the negotiations. During the course of the negotiations it was the oil companies who set the pace and proposed a system of licenses or concessions. In this regard the regulations were formulated according to the desires of the oil companies. But alternatives existed both for the Norwegian negotiators and the oil companies. In the first instance certain companies desired to obtain the sole rights to resources on the Norwegian continental shelf. This solution had been chosen by the Danes, giving AP Moeller sole rights on the Danish continental shelf, although this rapidly ceased to be of interest (Andersen 1993, Hahn Pedersen 1997). In such situations the authorities lose an essential part of their controlling functions, and risk losing a potential fortune. Industrial capacity During the first stage of establishment, it was the actors in the private sector that realised the possibilities for Norwegian industry. These comprised three groups: the engineering industries, shipping and the only national concern of international scale - Norsk Hydro. In the latter part of the 1960's, shipbuilding experienced a boom period that lasted into the early 1970's. At the same time the industry had undergone a long period of transformation in design